§235-122  Taxation of an S corporation and
its shareholders.  (a)  An election under section 1361(b)(3) and (e), or
1362(a) of the Internal Revenue Code shall be effective for the purposes of
this chapter.  Evidence of a valid election for federal purposes shall be
submitted to the department in such form and at such time the department may
prescribe.



(b)  Except as provided in the following
sentence, an S corporation shall not be subject to the tax imposed by section
235-71.  If income of an S corporation is subject to federal income tax, then
such income as modified by section 235-123, to the extent it constitutes income
attributable to the State, shall be taxed at the highest marginal rate of tax
imposed on the net income of corporations.  If an S corporation is required to
pay a tax to this State by reason of the preceding sentence, then the income
attributable to the State of the S corporation shall be reduced by the amount
of the tax.



(c)  Each shareholder's pro rata share of
income attributable to the State and each resident shareholder's pro rata share
of income not attributable to the State, to the extent modified pursuant to
section 235-123, shall be taken into account by the shareholder in the manner
provided in section 1366 of the Internal Revenue Code for the purposes of
section 235-4 and shall be taxable under section 235-51. [L 1990, c 16, pt of
§1; am L 1997, c 297, §5]